Wednesday, October 29, 2014

Et tu, City Journal?

[William] Ronan understood something else: transit was never going to pay for
itself, but that didn’t mean it should die, as it had been gradually
doing. “It’s time to stop talking about transit deficits,” he said. “We don’t talk about a police department deficit, but we need the subways as much as the police department.”

That is Nicole Gelinas recycling urban legend economics. Contrary to Ms Gelinas, transit in NYC did pay for itself for years. Including the NYC subways, which were first built as a profit seeking investment by the financier August Belmont in 1904. As we've written before;

While the city did float a bond issue to raise the funds to pay the
construction costs, the contractor and his financiers were completely
responsible for repaying the bondholders and the interest payments on
the bonds. Which they did, from fare box revenue. The city's
politicians who'd made the deal were at great pains to stress to their
public that that was the case, as this NY Times story of the groundbreaking ceremonies makes clear;

...at
the expiration of a shorter period (fifty years [with an option to
renew for another 25]) the city will own this tunnel railroad that will
have cost $36,500,000, and which is the key to the rapid transit
situation, without the expenditure of a single dollar for construction
or interest, it having simply used its credit under carefully guarded
guarantees for the time being to the advantage of the lessee, who
meanwhile pays the interest as it falls due and provides for the
liquidation of the bonds at the expiration of his lease."

That is, the contractor and the investors backing him would build the
system for the city, but receive a lease allowing them to operate it for
up to 75 years (and hopefully recoup their investment). The 'carefully
guarded guarantees' refer to the hefty sureties that had been put up by
the private entrepreneurs; between $5 and $8 million of their own
money.
It's easy to call that arrangement a subsidy from the private sector to the public, rather than the way Mr. [Timothy B.] Lee has it. A subsidy, without which, there surely wouldn't have been any subway as early as 1904.

And as to that remark by Mr. Ronan about not talking about a police department deficit, that is because policing is the classic public good--i.e. one that is consumed jointly and is not excludable. Something that can not be said of private goods that are consumed by easily identified users who are excludable using prices--i.e. things like candy bars, shirts, coats and pants, and rides on a subway.